DISASTER ASSISTANCE LOANS

Disaster assistance loans are utilized by businesses to recover from floods, fires, earthquakes, tornadoes, etc. that damage one or more aspects of their operation, from physical structure to inventory to lost business. Of course, adequate insurance policies offer the best protection for small business owners, but many businesses do not maintain adequate coverage. Small businesses are particularly reliant on disaster loans since they can not draw on the corporate coffers to which larger firms often turn. Some small business owners solicit loans from banks and other lending institutions, but many others turn to loan programs offered by the Small Business Administration (SBA) and other federal agencies. Indeed, the SBA is a primary source of funding for businesses seeking to rebuild after a disaster strikes.

Any business that qualifies under SBA definitions as a "small business," is located in a major disaster area, and has suffered damage as a consequence of that disaster may apply to 1) help repair or replace damaged property, or 2) help it meet those financial obligations that it would have been able to honor had a disaster not taken place. The SBA maintains separate programs for each of these eventualities. The agency notes, however, that qualification for an SBA disaster relief loan is not a given. "The SBA disaster relief program is not an immediate emergency relief program such as Red Cross assistance, temporary housing assistance, etc.," according to the agency. "It is a loan program to help you in your long-term rebuilding and repairing. To make a loan, we have to know the cost of repairing the damage, be satisfied that you can repay the loan, and take reasonable safeguards to help make sure the loan is paid."

PHYSICAL DISASTER BUSINESS LOANS The SBA makes physical disaster loans of up to $1.5 million to qualified businesses, provided that the businesses use this money for the repair or replacement of real property, equipment, machinery, fixtures, inventory, and leasehold improvements. This property may have been insured or uninsured prior to the disaster. "In addition," noted the SBA, "disaster loans to repair or replace real property or leasehold improvements may be increased by as much as 20 percent to protect the damaged real property against possible future disasters of the same type." This latter allowance can be particularly attractive to victims of natural disasters that tend to occur on a cyclical basis. Finally, some businesses can use this money to relocate, although the SBA cautions business owners not to formally commit to such plans before gaining loan approval. The SBA points out that the disaster loan is "made for specific and designated purposes. Remember that the penalty for misusing disaster funds is immediate repayment of one and a half times the original amount of the loan. The SBA requires that you obtain receipts and maintain good records of all loan expenditures as your restore your damaged property, and that you keep these receipts and records for three years."

Applications for these loans require the business to file a variety of financial and other records, including an itemized list of losses (with estimated replacement/repair cost), federal income tax information, history of the business, personal financial statements, and business financial statements. Whereas loans of less than $10,000 require no collateral, loans of amounts greater than that require the pledging of collateral to the extent that it is available. The SBA notes that while it will not decline a loan solely for lack of collateral, it does require businesses to pledge collateral when it is available.

Interest rates on physical disaster loans vary, depending on whether or not the applicant is able to obtain credit with other financial institutions. In instances where the business is not able to obtain credit elsewhere, U.S. law sets a maximum interest rate of 4 percent per year on these loans, with a maximum maturity of 30 years. Businesses that would be able to secure credit elsewhere, however, do not get quite so advantageous terms. For these latter enterprises, the interest rate is either 8 percent or whatever is being charged in the private sector at the time, whichever is less. The maturity of these loans cannot exceed three years. Nonprofit organizations can secure better interest rates and maturity terms through the SBA than can for-profit businesses.

ECONOMIC INJURY DISASTER LOANS The EIDL loan program is available to small business and small agricultural cooperatives that have suffered substantial economic injury resulting from a physical disaster or an agricultural production disaster. The SBA defines "substantial economic injury" as "the inability of a business to meet its obligations as they mature and to pay its ordinary and necessary operating expenses." In essence, it gives companies an opportunity to catch their breath in the wake of a disaster.

EIDL assistance is available only to those entities that are unable to secure credit from other private sources (banks, etc.). It is used less often than the physical disaster loan option for several other reasons as well: 1) The SBA limits its total assistance to any one company to $1.5 million, no matter how many programs are utilized. This means that a business that secures a $1.5 million loan for facility repair through the SBA's physical disaster business loan is not eligible for any funds through EIDL. 2) The SBA puts limitations on how EIDL funds can be used. For instance, these funds can not be used to pay cash bonuses or dividends, or for disbursements to owners, partners, officers, or stockholders who are not directly related to the performance of services for the business.3) Finally, EIDL loans do not give the borrower any leeway in the realms of relocation or physical improvements, both of which are sometimes possible through the SBA's physical disaster loan program.

In many other respects, however—determination of interest rates, penalties for misuse of funds, use of collateral, procedures for securing a loan, etc.—the procedures for EIDLs are largely the same as those for physical disaster business loans.

SBA LOANS AND FLOOD INSURANCE According to the SBA, if damage is caused by flooding, or the business is in a special flood hazard area, the business seeking the SBA loan must have flood insurance before the agency will disburse the loan. If the business was legally required to maintain flood insurance but did not, then the SBA will not grant a disaster loan.

DISASTER LOANS FOR PERSONAL PROPERTY AND HOMES The SBA also maintains loan programs for homeowners, renters, and/or personal property owners who are victimized by a disaster. Personal property loans of up to $40,000 are available to individuals, homeowners, or renters to help repair or replace personal goods (boats, automobiles, clothes, appliances, furniture, etc.). Real property loans of up to $200,000, meanwhile, are available to homeowners for replacement or repair of actual homes. These loans may not be used for home upgrades or additions, but can be targeted toward making structural improvements necessary to meet city or county building codes. Second homes and vacation homes are not eligible for these loans.

In recent years, critics of the SBA have charged that the majority of the agency's disaster loans have actually been granted to homeowners and renters through this latter program, rather than to the small business owners that are supposedly the primary reason for the agency's existence. Critics of this state of affairs have faulted both the SBA's priorities and an overly bureaucratic application process. These and other criticisms led the SBA to adopt a series of internal reforms in the mid-1990s that were designed to make it easier for small business owners to secure assistance in a broad range of areas. For example, in 1999 the SBA launched a five-year pilot program targeted at small business enterprises in communities that are statistically vulnerable to natural disasters such as hurricanes, tornadoes, earthquakes, and floods. This initiative, called the Pre-Disaster Mitigation Loan Program, makes available up to $50,000 in low-interest (4 percent rate for up to 30 years) loans to eligible businesses to make disaster-prevention improvements to their facilities. Annual funding for this program is $15 million.